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Conflict Minerals Disclosure Certain to Test Supply Chain Professionals’ Mettle

On Monday, June 2, public companies need to further boost their supplier transparency procedures. As well-intended as this is, the steps required to achieve this are fraught with opacity and a lack of direction.

On this first Monday in June, Dodd-Frank Section 1502 requires U.S. companies to expose “conflict minerals” within their supply chains. The objective is to compel corporations to be more socially responsible, since conflict minerals originate from countries with extremely poor human rights records.

To provide some background, conflict minerals encompass tungsten, tantalum, tin and gold (also known as 3TG metals), many of which originate from the Democratic Republic of Congo and its sovereign neighbors who trade them illegally. The Democratic Republic of Congo (DRC) was singled out because of the numerous human rights violations committed by mining operations within its borders each year.

3TG minerals are near essential for the manufacturing of many technological devices and other products, but the U.S. government has the necessary muscle to cleanse supply chains of these metals and prevent businesses from profiting at the expense of human rights. Europe and Canada already drafted similar disclosure requirements and expanded their proposals beyond the U.S. requirements. (I am sure there is more to come on this in the coming months.)

To eliminate conflict minerals from the supply chain, the Securities and Exchange Commission (SEC) is now requiring corporations to disclose the origins of materials, becoming the first piece of legislation to directly require action on the part of supply chain professionals. Yet with very little guidance for how to comply, most companies remain mired in the early stages of planning an audit, while others are still trying to determine whether it even applies to them.

One of the biggest issues facing corporations is simply how to tackle such a large project. The analysis has to focus on the entire supply chain, not just on direct suppliers, but those suppliers’ suppliers and so forth. Big or small, companies are going to be confronted with mountains of paperwork and months of “detective” work in order to analyze layer upon layer of suppliers, and then to identify the origin of the metals within their products.

Aside from collecting the data, organizing it is a separate, equally daunting task. Without a standard template from the SEC, companies are left to organize their findings themselves. Some companies resorted to templates drafted by independent entities, such as the Organization for Economic Cooperation and Development (OECD), while others began to create their own.

To tackle the filing process, strong leadership within a corporation is essential. Unfortunately, the SEC only identified that an executive officer should be responsible for signing off on the submission. Given this document pertains to supplier information, who should be accountable for the signature? As with any compliance project, many different departments need to review and approve the submission before the executive signing. That requires a great deal of coordination to ensure that each piece is completed and aligns with the organization’s standards.

It’s unclear whether the chief auditor, chief financial officer (CFO), chief procurement officer (CPO) or another executive should have the ultimate sign-off. Regardless, corporations are eager to avoid past missteps made when complying with other requirements. Sarbanes-Oxley remains the definitive example, in which inaccuracies were rampant despite the rigorous approval process within many organizations.

Once companies file successfully, they cannot be penalized by the government for using conflict minerals in their supply chain. The catch is companies are required to make the results public on their websites and in corporate literature so it can be accessible by any end user, or anyone who does business with them directly. Bottom line: These companies could face embarrassing public relations repercussions as fallout from conflict minerals in their supply chains. And, as many companies discovered, public relations crises can bring a dramatic cost to the bottom line, stock price and brand reputation.

With many factors to consider, the submission deadline can be extended by declaring a “DRC conflict undeterminable” status. This allows large companies, meaning those with more than $75 million in shares outstanding, two further years to examine their supply chains. Smaller companies get an extra four years. With extra time, companies can hopefully figure out the confusing protocol and how to prepare for future compliance.

Even with a deadline extension, companies need to act now. Below are three potential steps for tackling an audit in support of Dodd-Frank Section 1502:

  1. Identify a leader and build a team. Corporations need to establish a leader to coordinate the many departments that are responsible for ensuring the accuracy of the information submitted to the SEC. Missteps can be costly and everyone in an organization needs to be on board. The leader should be given a representative from every department to maintain a seamless audit.
  2. Create a process. Reporting conflict mineral status is going to become a regular piece of a corporation’s compliance puzzle. It is essential to establish a repeatable process that examines the supply chain and the suppliers on an ongoing basis. Adopting a software platform or other means to effectively manage a supply chain’s conflict mineral status ensures accuracy, and eases the complexities that come with the deep analysis.
  3. Coordinate a public relations strategy. Conflict minerals are likely going to be uncovered in corporations’ supply chains. With public disclosure, a contaminated supply chain has the potential to earn negative media attention. An appropriate communications strategy is crucial to minimize the impact on a corporation’s value and brand.

By getting a jumpstart on the planning and audit process, and organizing a company-wide effort, corporations should be able to implement a successful process that accurately identifies the mining origins of their materials. As time-consuming as this endeavor undoubtedly is, the result is sure to give companies a conflict mineral-free stamp of approval that provides peace of mind to management and consumers alike.

Rose Kelly-Falls is currently the senior vice president and head of supply chain risk at Rapid Ratings International Inc., and leads the supply chain business segment for the company. She works with supply chain clients as they develop, implement and grow their risk management initiatives by sharing best practices and collaborating on process improvement.

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